The Irish Independent reports that Irish shares plunged to their lowest levels in almost three years as markets around the world took fright amid fresh trouble in the financial sector, a sliding dollar and record oil prices.
The Iseq Overall index slid as much as 4.1pc -- or 256 points -- yesterday and threatened at one stage to crash through the key psychological 6,000-point level for the first time since May 2005. However, it stopped short of that mark and ended the session at 6,070.04, down 3pc.
Elsewhere in Europe, the UK's FTSE 100 and Frankfurt's DAX 30 each sank 1.5pc, while the CAC 40 in Paris dropped 1.4pc.
Brunt
"Once again, the Irish market is paying the price of being dominated by financial stocks, which have borne the brunt of the sell-off," said one Dublin-based dealer.
The latest source of turmoil in the financial sector has been US mortgage bond fund, Carlyle Group, which began to buckle one week ago from the strain of shrinking home-loan assets.
The group edged closer to collapse as creditors prepared to seize the group's assets after it failed to meet more than $400m of "margin calls" from its own banks.
"Everything you see with the Carlyle Capital is putting a lot of uncertainty into the market," said Philippe Gijsels, senior equity strategist at Fortis Global Markets in Brussels. Investors "need more visibility on earnings and on credit losses. We are certainly not buyers," he said.
Anglo Irish Bank led Irish financial stocks lower, falling 4.9pc to €8.35, while Allied Irish Banks slid 4.1pc to €13.05, Bank of Ireland lost 2.2pc to €9.11 and Irish Life & Permanent dropped 4pc to €10.35.
The bad news pulled the rug out from a short-lived rally among financial stocks earlier this week after the Federal Reserve, America's central bank, unveiled plans to pump $200m into the banking system.
Investors woes were compounded as oil prices continued their bull run to hit a record high of $111 a barrel as dollar dropped to a new low against the euro of $1.56.
"The adverse effects from the troubles in the credit market are growing worse, the US economy is in recession, Europe is slowing down but Asia is still holding up," said Wolfgang Hoetzendorfer, chief investment officer at State Street Global Advisors in Germany.
"There will be an impact on equity markets through slower corporate earnings growth," the CEO added.
While the Federal Reserve has aggressively cut rates in an effort to shore up the world's largest economy, the European Central Bank has given no signals that it intents to follow suit.
The Irish Independent also reports that Anglo Irish Bank and AIB have been singled out as the most aggressive Irish lenders in the British commercial property market in a new report.
The report, from investment bank Merrill Lynch and based on a survey of valuers, also named HBOS and Royal Bank of Scotland as financial institutions with the most aggressive lending standards in the British commercial property market.
"The findings are less reassuring than we had expected," Merrill Lynch analysts said in a survey note published yesterday.
The note follows record bank lending to Britain's real estate industry and a post-summer downturn in commercial property which has already lopped 14pc off capital values.
"The UK commercial real estate bubble is bursting and the banks are going to lose money.
"The question that investors want answered now more than ever is how good, or bad, has underwriting been and how much money will lenders lose as a consequence?" the note said.
Merrill said the survey was conducted between January 29 and February 8 and covered 13 of Britain's 17 biggest commercial property valuation firms.
The City of London office sector and developments were cited by the US investment bank as areas that could still surprise negatively.
Tenant demand for space in the UK was the key factor which would determine how low commercial property prices could go and how high the risks to creditor banks might be.
"Bank earnings will be impacted by record capital value declines, but the key to asset quality is the occupier market," the note said.
Challenging
"Here, the credit crunch impact is unclear and while we do not expect a repeat of the disastrous London office market of the early 1990s, the outlook is challenging," it continued.
A spokeswoman for Allied Irish Banks said it had a conservative lending policy.
"Merrill says the Irish banks are more relationship driven," she said.
"We would be well known as a very relationship-driven bank with a conservative lending policy and while we may have done some big individual deals, you need to look into the lending practice behind them, which you'll find is conservative."
HBOS had no immediate comment on the contents of the note. Royal Bank of Scotland and Anglo Irish Bank were not immediately available for comment.
The Irish Times reports that the Irish economy is set to grow at a slower pace this year than at any time in the past two decades. The Economic and Social Research Institute (ESRI) has revised downwards its forecast for economic growth in 2008 to just 1.6 per cent, due principally to the severity of the contraction in house building.
The ESRI's latest growth forecast for 2008 is well below the 2.8 per cent real expansion rate projected for the economy by Minister for Finance Brian Cowen in this year's budget. The deterioration in the economic outlook over the past three months has caused the ESRI to adjust downwards its own forecast for real growth in gross national product this year from 2.3 per cent to 1.6 per cent.
While economic growth is slowing, inflation is picking up again. The annual rate of inflation accelerated to 4.8 per cent in February from 4.3 per cent in January, according to the Consumer Price Index, published yesterday by the Central Statistics Office.
When mortgage interest is excluded, the annual rate of price increase still quickened to 3.5 per cent in February from 3.1 per cent in January. In the 2008 budget, the Government had forecast that, excluding mortgage interest, average prices would rise by 2.4 per cent this year.
The decline in house building is the principal factor driving this year's growth rate downwards. In its latest quarterly economic commentary, published today, the ESRI is forecasting 50,000 housing completions this year, a sizeable drop on the estimated 78,000 houses built in 2007. In turn, the decline in housing output is expected to force a 7.4 per cent fall in the volume of gross fixed investment during 2008.
Moreover, the ESRI foresees a continuing weakening in housing construction into 2009, projecting a further decline to 45,000 completed housing units next year. However, the ESRI predicts that the fall in house prices may already have been arrested. It reckons that house prices in the early part of 2008 are some 15 per cent lower than in December 2006. On this basis, the commentary concludes: "For 2008 and 2009, we expect generally stable house prices."
Following the consumer boom of the past three years, the growth in the volume of household spending is forecast to ease back to 3.0 per cent in 2008. The ESRI is projecting that money wage growth will decelerate from 5.5 per cent in 2007 to 4.0 per cent this year.
The first casualties of slower growth will be the labour force and the public finances. No increase in employment is now expected this year, while the numbers out of work are projected to rise by 33,000 to 135,000 in 2008.
As a result, the unemployment rate - the numbers out of work as a percentage of the labour force - is expected to increase to 6.0 per cent in 2008 from 4.6 per cent last year.
The economic slowdown is also pushing the public finances deeper into deficit. Already, the weakening pace of activity growth is causing tax receipts to slip significantly below the targets set by the exchequer. At the same time, public spending - current and capital - has been rising rapidly since 2006.
As a result, the ESRI forecasts that an exchequer surplus of €2.3 billion in 2006 will be transformed into an deficit of €7.5 billion by 2009. This represents a deterioration of almost €10 billion in the exchequer's annual financial position in the space of just three years.
After a tough year in 2008, the ESRI anticipates a modest recovery in 2009. Growth in real gross national product is forecast to accelerate from 1.6 per cent this year to 3.0 per cent in 2009.
The revival in growth prospects in 2008 is based on the assumption that the housing shock will largely be absorbed this year. Strong growth will clear the way for a resumption in employment expansion and the ESRI projects that 24,000 people will be added to the workforce during 2009.
The Irish Times also reports that businessman Samir Naji, founder and chairman of Horizon Technology Group, stands to realise €36.61 million if the company accepts a €97.14 million approach for the business from an unnamed trade suitor.
Unusually for a company making the first notification of an unsolicited approach, Horizon specified the price mooted by the bidder.
At €1.18 per ordinary share, the approach values the company at significantly in excess of twice the market value implied by its closing price of 47 cent on Wednesday.
Having seen its share price fall as low as 35 cent after a profit warning in January from a 12-month high of €1.17 a year ago, Horizon's naming of the price mooted in an approach "which may or may not lead to an offer to acquire the company" was seen by close observers of the company as an implicit indication of a willingness to deal with the suitor.
However, Horizon emphasised to shareholders that the approach was preliminary and subject to a number of conditions.
"Accordingly, no assurances can be given that a formal offer will be forthcoming or that any transaction will occur."
A spokesman for Horizon declined last night to identify the suitor. While the company's share price weakness led to some speculation that Mr Naji might attempt to raise money to take business private, it is understood that Horizon's management is not involved in the approach.
In annual results issued before Horizon notified the market of the approach, the company said its pretax profit was static at €6.03 million last year, while revenues grew 12 per cent to €288.21 million.
Earnings before interest tax depreciation and amortisation grew 6 per cent to €10.65 and diluted adjusted earnings per share increased 3 per cent to 9.39 cent.
Horizon said in January it was setting aside €800,000 to cover a bad debt after a British customer went into administration and said then revenue was "lower than expected in December, partly due to orders slipping into 2008".
It said yesterday that some deferred orders have since been received and others are still expected early in 2008. None were cancelled.
The son of an Egyptian father and Cork mother, Mr Naji set up Horizon in Cork in 1988.
His stake in the business was valued at £113 million after its flotation in 1999.
The Irish Examiner reports that the K Club golf course in Kildare lost more than €4 million in 2006, the year it played host to the Ryder Cup.
The K Club is owned by paper tycoon Michael Smurfit and property developer Gerry Gannon who bought the course and its hotel from the Smurfit Group in 2005. The two men paid €115m for the prestigious course and a defunct paper mill in south Dublin that Mr Gannon is seeking to turn into a residential development.
According to accounts just filed at the Companies Registration Office for Bishopscourt Investments, the club’s holding company, turnover for 2006 was €22.2m. The company earns its revenues from the plush hotel adjacent to the course and from fees from members.
The financial performance for 2006 cannot be directly compared with the previous year as the accounts in 2005 cover only the nine months to end December 2005.
Over those nine months the club made a pre-tax profit of €4.7m on turnover of €13.4m. In the 2005 financial year the company benefited from an exceptional gain of €7.1m from the sale of land. This was sold to Mr Gannon, who also holds an option to acquire additional land on the K Club site.
The company’s balance sheet shows that shareholders’ funds decreased year-on-year to €32.2m from €37m as a result of the losses in 2006.
No reason for the move into the red in 2006 was given in the accounts, though the company did incur direct costs of €417,000 from the staging of the Ryder Cup in September of that year.
Staff costs in 2006 came to €9.3m for the company’s 285 employees.
Remuneration for the company’s five directors came to €150,000.
The directors of the company are Mr Gannon, Dr Smurfit, Arthur French (a property development and close associate of Dr Smurfit), Michael Smurfit Jnr and Tony Smurfit.
The Financial Times reports that the dollar plummeted to record lows and the price of gold touched $1,000 on Thursday as retail sales figuresconfirmed that the US is in recession and concern intensified about spreading distress in the hedge fund sector.
In a turbulent day of trading, the US dollar tumbled against the yen, breaking through Y100 to the dollar for the first time since 1995, before recovering to Y100.79. The euro moved to record highs above $1.56 – at which point Goldman Sachs estimated that the eurozone had overtaken the US as the world’s biggest economy measured by market exchange rates – before easing slightly.
Investors initially fled to the safety of government bonds, while stock markets fell sharply in Asia and Europe.
However, markets steadied as senior Democrats in Congress put forward a rescue plan to offer $300bn in loan guarantees for new mortgages and Standard & Poor’s issued a report suggesting that the worst of the writedowns on subprime mortgages were over.
Hank Paulson, US Treasury secretary, meanwhile, called on financial institutions to raise new equity and cut dividends as he unveiled regulatory proposals to prevent a repetition of the credit crisis.
Analysts said the market stress was being driven by the sharp decline in the dollar and forced sales by hedge funds under pressure from their bank lenders to reduce their portfolios.
“The broad story is one of dollar weakness,” said Alan Ruskin, a strategist at RBS Greenwich Capital.
TJ Marta, a strategist at RBC Capital Markets, said: “The feeling across fixed income trading floors is that the bottom is dropping out of markets. The Fed can cushion the blow but the market’s faith that they can provide a silver bullet is misplaced.”
Meanwhile, shares in Bear Stearns suffered again, dropping 7 per cent in New York over worries about the investment bank’s exposure to Carlyle Capital and other troubled funds. The cost of protecting $10m of Bear Stearns debt against default over a five-year period soared to $720,000 annually on Thursday, compared with $580,000 on Wednesday. Even brokers offering $1.1m for a one-year contract said there had been no takers.
Analysts said the weakness of the dollar, in part caused by Fed rate cuts and injections of liquidity, was fuelling commodity prices, which in turn raised fears of inflation, pushing up gold.
The markets are simultaneously grappling with forced deleveraging by hedge funds. David Rosenberg, chief US economist at Merrill Lynch, said: “The credit crunch has now reached the hedge fund industry.”
Mohammed El Erian, co-chief executive of Pimco, said: “Today’s price action points to a growing number of hedge funds having to go into survival mode.”
Spot gold traded above $1,000 a troy ounce for the first time, while West Texas Intermediate crude oil hit $111 a barrel before dropping back. The trades above $1,000 an ounce in the spot bullion market in London were confirmed by several banks, although the level was contentious as it was not reflected on several trading systems.
Asian stock markets fell heavily, with the Nikkei down 3.3 per cent and the Hong Kong Hang Seng index down 4.8 per cent. In London, the FTSE 100 fell 1.45 per cent to 5,692.4.
However, there was some respite in New York, where the S&P 500 closed up 0.5 per cent.
The FT also reports that Britons hiding money in tax havens have evaded up to £1.5bn of tax a year, according to the first official estimate of the “tax gap”.
Most of the £80bn that Revenue & Customs believes was stashed offshore in 2005 was held in the Channel Islands and the Isle of Man, says a research paper on the difference between the tax Revenue & Customs collects and ought to collect.
Switzerland was the next most important destination for undeclared funds, followed by the Cayman Islands, Singapore, Hong Kong and the Bahamas.
The tax gap – the result of both avoidance and evasion – was estimated at between £11bn and £41bn, compared with total 2003-04 revenues from direct tax and national insurance of £246bn.
Brendan Barber, general secretary of the TUC said the gap’s scale pointed to “huge amounts of unpaid tax by the super-rich, enough to cut taxes for ordinary people, boost public services and do far more to tackle child poverty than the limited measures in [the] budget.”
The corporation tax gap was between £3bn and £14bn, according to the analysis published with the Budget. The in-house tax teams of banking, insurance and oil companies helped avoid some £2bn corporation tax and £500m national insurance contributions a year. Other sectors, which tended to rely on schemes devised by external advisers, avoided about £7.5bn a year.
But Revenue & Customs insisted the figures did not give an accurate impression of present levels of avoidance and evasion. The 2005 estimates were subject “to a wide margin of error” and “based on historical data prior to the major transformation in HMRC’s strategy, so don’t reflect today’s situation”. It highlighted the introduction of disclosure rules in 2004 that required tax planners to give the Revenue early warning of new schemes, helping it quickly close loopholes.
Although aggressive avoidance by companies has significantly declined since the start of the decade, international restructuring by multinationals is allowing them to reduce their tax bills.
The research paper acknowledged its estimates of the tax gap were problematic, particularly involving tax avoidance. “Many issues bearing on the determination of tax liabilities involve judgements that are not unambiguous and may ultimately only be settled in the courts. This is especially true of corporate tax . . .”
The figures predate the European Savings Directive, under which some jurisdictions such as the Cayman Islands agreed to exchange information on savings, while others imposed a withholding tax. They also predate a partial tax “amnesty” launched by Revenue & Customs last year, after legal rulings forcing high street banks to disclose information on offshore accounts.
The New York Times reports that on Thursday, the dollar plumbed new lows against the Japanese yen and several other major currencies; the price of an ounce of gold jumped above $1,000 for the first time; and lenders raised home loan rates once again. Government figures showed retail sales fell in February as consumers cut back on cars, furniture and electronics.
Stocks fell sharply after the retail sales report was released early in the day, and a large investment fund said it was nearing collapse. The volatility that has defined the market lately continued unabated.
The Standard & Poor’s 500-stock index fell 2 percent in the morning, then rebounded partly in reaction to a report that said banks were nearing the end of subprime mortgage losses. It was up nearly 1 percent in the afternoon before paring that gain to close up 0.5 percent, to 1,315.48 points. The Dow Jones industrial average closed up 35.5 points, to 12,145.74 points.
A toxic blend of economic and financial developments is testing policy makers and lawmakers who are struggling to contain the slump brought on by the collapse of the mortgage market, a downturn that now looks sure to push the economy into a recession. Though current conditions are a far cry from the 1970s, resurgent inflation is raising the threat of stagflation — a condition in which unemployment and the price of goods and services both rise.
Since the credit markets began to seize up in August, the steps taken by the Federal Reserve and the rest of the federal government have often bolstered stocks briefly, but so far they have done little to stem the larger downward drift.
Many specialists say policy makers can do only so much to protect the economy and warn that the government should be careful not to exacerbate inflation and create a new bubble like the one in housing that has burst. Lower interest rates and increased federal spending may not be enough to shore up growth, and some suggest that the only remedy for the pain may be the pain itself. A Standard & Poor’s report predicted that subprime mortgage write-downs at banks were nearly done, though losses in other areas might continue.
“We have to be careful about what medicines we throw at this, whether it’s stimulus packages or a bailout,” said Liz Ann Sonders, chief investment strategist at Charles Schwab & Company. “A lot of what we are dealing with is a solvency problem. We need to let the system wash it out.”
By this way of thinking, the markets will eventually correct themselves. The housing and mortgage markets will pick up once home prices have fallen far enough to attract buyers. The dollar will keep falling until the weaker exchange rate increases American exports and, in turn, the broader economy.
Stocks and bonds will decline until weaker players who rely heavily on borrowed money are driven out of the markets, allowing those who were more conservative to invest cheaply.
“It’s not a silver lining; it’s a platinum lining,” Carl B. Weinberg, chief economist at High Frequency Economics, said about the falling dollar and exports.
In the past 12 months, the dollar has slid nearly 14 percent against six major world currencies, reaching its lowest levels since the American exchange rate was allowed to float freely in the 1970s. Exports in January, by comparison, were up 16.3 percent from a year earlier; imports were up 10.9 percent.
On Thursday, one dollar fetched 100.69 yen, the lowest level since the mid-1990s and down 13.4 percent over the last year. The dollar has slipped 8.4 percent against the Chinese yuan and 18.4 percent against the euro.
The fall of the dollar has contributed to the surge in commodity prices, many specialists say. Oil, foodstuffs and many other raw materials are priced in dollars, and as the currency falls in value, suppliers of these commodities demand higher prices just to stay even.
The weakness of the dollar partly explains why oil prices have jumped $23 a barrel in the past six weeks alone. Oil futures touched $111 a barrel for the first time on Thursday and settled at $110.33 a barrel on the New York Mercantile Exchange, up 41 cents. Gold prices surged past $1,000 a troy ounce but closed at $993.80, up 1.4 percent for the day.
“Where do you go?” said John Kilduff, senior vice president for energy at MF Global in New York. “Where do investors go? Obviously, they are fleeing the dollar and seeking out hard assets like commodities. And that’s pushing up oil prices.”
For American consumers, the surge in commodity prices comes on top of falling home prices, tightening credit conditions and, lately, a weakening job market. The national average 30-year fixed mortgage rate climbed to 6.13 percent on Thursday, from 6.03 percent a week earlier, according to Freddie Mac. The rate on five-year adjustable rate loans jumped to 5.58 percent, from 5.34 percent.
It is no wonder, economists say, that retail sales and other measures of consumer spending are falling.
“We are nearing levels where it’s probably not a great thing for the dollar to keep weakening,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn.
The Federal Reserve’s decisions to cut short-term interest rates to 3 percent, from 5.25 percent last year, is one of the biggest factors driving the dollar lower, experts say. Interest rates in Europe and much of Asia are higher, drawing investors to those currencies.
Policy makers at the Fed have acknowledged concerns about the dollar and inflation but have stressed that they are far more worried about a significant slowdown in economic growth. Ben S. Bernanke, the chairman of the Fed, will give a speech Friday in Washington in which he is expected to provide an update on the central bank’s thinking. The Fed is widely expected to reduce interest rates again next week.
The Fed is in an unenviable position. Even as it has to guard against inflation, parts of the financial system are under severe pressure.
On Thursday, Carlyle Capital, an affiliate of the private equity firm the Carlyle Group, said that its negotiations with lenders had broken down and that it was in default on $16.6 billion in loans. Carlyle had borrowed the money to buy mortgage securities backed by Fannie Mae and Freddie Mac. All appeared well until the prices of those bonds declined and the lenders made a margin call — a demand that Carlyle put up more collateral to cover the loans.
Andrew Feltus, a bond fund manager at Pioneer Investments in Boston, said the banks were reducing the amount of money they lend to the financial system. Few investors want to buy in the middle of this process, because they expect even lower prices as funds are forced to sell.
“You have not seen the rush to risk at all,” he said. “People are still scared.”
Anthony Lembke, a portfolio manager at MKP Capital Management, a hedge fund, said one of the biggest uncertainties in the bond market is the size of the losses in mortgage securities. Banks and investors are both expected to remain jittery, even about safer investments, until they have a firmer answer.
“We have got to get to the bottom of the housing market,” he said, “before we know how big the losses are going to be.”
Bond prices fell as stocks rose Thursday. The benchmark 10-year Treasury note dropped 16/32, to 99 25/32. The yield, which moves in the opposite direction, rose to 3.53 percent, from 3.46 percent.
We will add the second NYT story when the server speeds up - it is currently crawling.
